Deciding what type of company you are, whether you’re acquiring a business or starting a new one, is the first step in business planning. Your company type is most often referred to as your business structure in which you have several options to choose from. You can either incorporate as an S corporation, C corporation, LLC or non-profit, or file as a DBA or partnership.
Incorporating, defined as forming a new corporation, as an S corp actually requires you to file as a C corp first, then file for subchapter S corp status. To meet S corp requirements, your business must have fewer than 100 individual shareholders (not corporations), be owned by US citizens or alien residents, and have no more than one stock class.
S corps are not subject to double taxation, as is the case with C corps, meaning revenue is not taxed at the corporate level. Small businesses benefit most from filing as an S corp.
This is the most common type of business structure. C corps have zero restrictions on ownership, so it can be passed on perpetually. There are also no shareholder limitations as is the case with S corps, and C corps can have multiple classes of stocks, not just one. The downsides to C corps are the double taxation (company and shareholder dividends) and lack of deductible corporate losses.
For bigger businesses who seek unlimited growth, the benefits outweigh the disadvantages.
LLC’s are the most flexible type of business structure. They have pass-through taxes, as seen with S corps, and personal liability protection. Anyone can create an LLC, not just US citizens or legal residents, but it’s subject to self-employment taxes and different regulations depending on the state you’re in.
The best type of business for LLC’s are startups expecting a loss for the first few years or if you own real estate.
There are two types of partnerships: general and limited. General partnerships are a jointly owned business, sharing all assets, profits, financial obligations, and legal liabilities. General partnerships are unlimited in the sense of growth and profit, but also in debt and responsibility.
Liability and management in a limited partnership resides with the “general partner”. Limited partners can invest in the company without holding control over its operations. It’s used most often with short-term projects like real estate, film production, accounting firms, and law offices.
The major benefit of a nonprofit business structure is the eligibility for private and public grants. Nonprofits do need to file Articles of Incorporation like a regular corporation but are subject to different state laws. Also, personal assets are separated from the company’s liabilities so you are legally protected against organizational loss.
Educational, charitable, and religious organizations benefit most from filing as a nonprofit.